We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Peloton’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 7.3% over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its number of connected fitness subscribers, which reached 2.88 million in the latest quarter. Over the last two years, Peloton’s connected fitness subscribers were flat. Because this number is higher than its revenue growth during the same period, we can see the company’s monetization has fallen.

This quarter, Peloton’s revenue fell by 9.4% year on year to $673.9 million but beat Wall Street’s estimates by 2.9%. Company management is currently guiding for a 14.3% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 5.8% over the next 12 months. Although this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

While Peloton posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Peloton’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.8%, meaning it lit $1.84 of cash on fire for every $100 in revenue.

Peloton’s free cash flow clocked in at $106 million in Q4, equivalent to a 15.7% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Peloton’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 5.8% for the last 12 months will increase to 10%, giving it more flexibility for investments, share buybacks, and dividends.

Key Takeaways from Peloton’s Q4 Results

We were impressed by Peloton’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter showed that profitability is strong and a turnaround is in progreess. The stock traded up 12.5% to $8.55 immediately following the results.

So do we think Peloton is an attractive buy at the current price? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free .